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Crisis talk: US cuts rate; UK readies huge bailout
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October 08, 2008 17:19 IST

The US Federal Reserve cut a key interest rate by half a percentage point on Wednesday to steady an economy teetering on the kind of financial collapse that the United States suffered in 1929.

Fed Chairman Ben Bernanke and his colleagues ratcheted down their key rate by 0.5 percentage point to 1.5 per cent.

The action revives the central bank's rate-cutting campaign which had been halted in June out of concerns that those low rates would worsen inflation.

Since then, however, economic and financial conditions have dangerously deteriorated, forcing the Fed to reverse course.

And, in a surprising move, the Federal Reserve also indicated that it would lend money directly to US companies, bypassing banks.

The Federal Reserve has already taken some extraordinary, and indeed unconventional, measures like nationalizing some financial institutions and insurers.

The fact that the Fed felt it couldn't wait until its regularly scheduled meeting on October 28-29, underscored the urgency of the situation.

The Fed took the action in a coordinated move with other central banks, which also were cutting their rates.

"The pace of economic activity has slowed markedly in recent months," the Fed said. "Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."

Although inflation has been high, the Fed believes that the recent drop in energy prices and the weaker prospects for economic activity have reduced this threat to the economy.

UK's 50-billion pound rescue plan for banks

The British government on Wednesday announced a 50 billion pounds ($87.7 billion) emergency rescue plan to partly nationalise major banks, no sooner than the stock prices plunged raising investors fear about their survivability in the global financial meltdown.

Assuring that the move would help stabilise eight major British banks, the Prime Minister Gordon Brown billed it as a "radical" plan to restore public "confidence and trust" in the financial system.

Under the move unveiled half an hour before the markets opened on Wednesday, the treasury said it would be investing up to 50 billion pounds in exchange for preference shares in eight of the country's largest banks and building societies: Abbey National PLC, Barclay's PLC, HSBC, HBOS, Lloyds [Get Quote] TSB Bank, Royal Bank of Scotland, Nationwide building society and Standard and Chartered Bank.

Prime Minister Gordon Brown told newsmen at 10, Downing Street: "Extraordinary times call for the bold and far-reaching solutions."

"Our stability and restructuring programme is comprehensive, it is specific and it breaks new ground. This is not a time for conventional thinking or outdated dogma but for the fresh and innovative intervention that gets to the heart of the problem," he said.

 Chancellor of Exchequer Alistair Darling said the scheme would see taxpayers' money used to buy stakes in major banks in an attempt to halt the meltdown in the financial sector.

And the government said it stood ready to make at least another 25 billion pounds available for other eligible institutions.

The rescue plan came a day after the British banks stock prices plunged on investor fears that they wont be able to get through the global financial meltdown without help.

The Bank of England also announced that it will also make available 200-billion pounds in short term loans and issue 250-billion pounds to guarantee loans between banks.

In return for the public-backed cash injection, the Government is demanding that the banks must cap executive pay and shareholder dividends and commit to supporting lending to home-buyers and small businesses.

The Chancellor made it clear that the government was absolutely not seeking to take control of the banks.

"We are not going to run the banks. They will run as commercial operations, albeit with the government help in its restructuring," he said in a joint news conference with Brown.

Following the government intervention the market welcomed the treasury move and bank share prices began stabilising and recovering in early trading.

Emphasising that the taxpayer interests would be protected, an official statement said: "If the government is to provide the capital, the issue will carry terms and conditions that appropriately reflect the financial commitment being made by the taxpayer.

The Prime Minister said the recovery plan would be funded through increased borrowing but insisted taxpayers would "earn a proper return".

The rescue plan marks a sharp turn in the fortunes of the British banks, which till now seemed immune to global financial crisis being faced by America's beleaguered financial institutions.

Just three weeks ago Barclays snapped up North American operations of Lehmann Brothers, the collapsed Wall Street giant.

Global banking major HSBC has welcomed the UK government's proposals to inject capital into the country's banking system to improve liquidity.

In a filing to the London Stock Exchange on Wednesday, HSBC said it would ensure that its principal UK subsidiary HSBC Bank plc continues to be appropriately capitalised and added that it has therefore has no current plans to utilise the UK recapitalisation initiative.

"The HSBC Group supports efforts to stabilise the operation of financial markets and yesterday provided significant amounts of liquidity to the London Sterling interbank market, lending around two billion pounds of three-month and six-month money to other banks.

"HSBC believes its actions will contribute to easing the strain in UK money markets, where the availability of three-month and six-month interbank loans has been very tight in recent weeks," the filing added.

Iceland in grave trouble

Sweden and the United Kingdom have helped bail out Iceland's biggest bank in an emergency move, and said that they will guarantee deposits, even as the global financial tsunami hit Iceland.

Iceland too has been demonstrating socialistic measures: just a few days ago it took over the tiny nation's second-biggest bank, fixed the exchange rate of its falling currency, and asked Russia for a Euro 4 billion loan to keep the economy from collapsing totally.

Asian markets crash; Japan touches 20-yr low

Asian and European markets plummeted on Wednesday with Japanese stocks hitting the lowest levels in over 20 years as the financial crisis deepened despite various governments extending bailout packages.

Japan's benchmark index Nikkei 225 plunged more than 9 per cent to touch its lowest level since 1987. It closed at 9,203.32 down 952 points.

Among the major losers on the Japanese bourse include auto giants -- Nissan, Toyota and Honda.

Further, another key Asian index -- Hong Kong's Hang Seng dropped 8.17 per cent to 15,431.73 points.

The country's benchmark index fell despite the Hong Kong Monetary Authority cutting down interest rate to improve the credit situation.

South Korea's Kospi index nosedived nearly six per cent to 1,286.69 points, while China's Shanghai Composite index declined three per cent to 2,092.22 points and Singapore's Strait Times plunged over six per cent.

With bearish trends gripping the market, India's benchmark Sensex tumbled as much as 954 points during the intra-day trade, falling below the psychological 11,000 level.

Analysts said the the meltdown across the global markets was due to the concerns that despite government efforts, the financial crisis has continued to deepen in the UK and the US.

After falling above 10 per cent, Indonesian stock exchange halted trading, as the country's benchmark Jakarta Composite Index fell 10.38 per cent to 1,451.67. The suspension in trading is reportedly happening for the first time in eight years.

Europe plunges over 5%

The bourses in Europe also plunged over five per cent amid the UK government's announcement of over 200-billion pound assistance to the financial institutions. Under the proposed initiatives, Bank of England would take all actions necessary to ensure that the banking system has access to sufficient liquidity in the short term and at least 200 billion pound would be made available to banks under the special liquidity scheme, a statement from HM Treasury said.

London Stock Exchange's FTSE 100 also opened on a weak note and was trading down over 5.12 per cent or 235.66 at 4,369.56 points, while the German Dax Index was trading deep in the red down over six per cent at 4,986.4 in the morning trade.

French CAC 40 Index was also trading down 6.50 per cent at 3,489.61 points.

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